Wednesday, April 29, 2015

"Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 0.2 percent in the first quarter of 2015, according to the 'advance' estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent."

So basically zero growth. And some people want higher rates of interest to preclude the danger of inflation. Oh brother.

Tuesday, April 28, 2015

The World Economic Association conducted and interview with Esteban Pérez Caldentey, Miguel Torres and Romain Zivy, from Economic Commission for Latin America and the Caribbean (ECLAC), on a recently published book on neo-structuralism by Alicia Bárcena and Antonio Prado (eds.), Neo-structuralism and Heterodox Currents in Latin America and the Caribbean at the Beginning of the XXI Century. From the interview:

What is neo-structuralism?

Neo-structuralism is a modern version of the structuralist current of thought which flourished in Latin America and the Caribbean in the 1950s and 1960s based on the thinking of a group of economists mostly based in ECLAC. Famous structuralists include Celso Furtado (1920-2004); W. Arthur Lewis (1915-1991), Raúl Prebisch (1901-1986), Juan Noyola Vázquez (1922-1962); Aníbal Pinto Santa Cruz (1919-1996); Osvaldo Sunkel (1929-) and Ignácio Rangel (1914-1994). The development of structuralism also benefited substantially from the work of economists such as Nicholas Kaldor and Michael Kalecki.

Structuralist thought emerged as a response to the development problems of Latin America and the Caribbean and dissatisfaction with orthodox responses. For structuralists underdevelopment was not due to exogenous forces or shocks or to bad policy, but it was rather an intrinsic feature of Latin America and the Caribbean ingrained in its own social and economic structure. Hence structuralism was a way to conceptualize the Latin American and Caribbean reality. Structuralism ‘became a practice, before being a policy and a policy prior to becoming a theory.’

Monday, April 27, 2015

Mankiw links to a poll in his defense of Free Trade in which a selected group of economists responded to two questions:

Question A: By lowering bargaining costs, fast-track negotiating authority for the president makes it more likely that the U.S. can conclude major trade deals

Question B: Past major trade deals have benefited most Americans

Not exactly whether they believe Free Trade based on comparative advantage holds as a theory. Note that one my think that trade is determined by absolute advantage, which would imply that some degree of trade management is required if a country is not to be out-competed by low cost countries, and still agree with both propositions.

So here a poll to see how many readers of this blog think the theoretical proposition is correct (and how many of these are economists).

Poll disabled; results above. So in contrast to Mankiw's results, most readers of this blog, including economists, think that comparative advantage does not always determine trade patterns. Free Trade might not be the best policy in that case. Maybe that means that there is a strong consensus among heterodox economists that free trade is not good for all countries involved. Likely, but this is hardly a reliable poll.

Mankiw tells us in his most recent NYTimes column that economists agree that Free Trade is good. He links to a poll in which, essentially, mainstream economists of different persuasions, some Keynesian and some not, and different political views, some liberal and some conservative, say that trade agreements are good. He backs his argument by suggesting that theoretically the argument is at the heart of the economics profession since the beginning; I guess an argument of authority.

And no better authority than Adam Smith. Mankiw says:

"The economic argument for free trade dates back to Adam Smith, the 18th-century author of 'The Wealth of Nations' and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society."

And it is true, Adam Smith was for laissez-faire, in general, and thought that less intervention in trade would be good. But there is in Mankiw's argument an implication that does not follow from careful analysis of Smith's doctrines, namely: that Adam Smith can be seen as a forerunner of modern neoclassical trade theory based on the Heckscher-Ohlin-Samuelson (HOS) comparative advantage argument (for the limitations of that theory go here).

Comparative advantage implies that countries should specialize on the production of commodities for which they have a lower opportunity cost. Specialization would increase productivity domestically, and importation of goods for which other countries have a lower opportunity cost would lead to mutual advantageous trade to all parties involved. This was actually first noted by Ricardo and Torrens more than 40 years after the publication of the Wealth of Nations. Smith believed that absolute advantage, meaning lower costs of production, not comparative advantage determined trade patterns.

Smith thought that free trade was a better policy than protectionism, since he believed that trade would expand the potential markets for home producers, which would lead to more division of labor, that is, higher productivity, leading to lower costs, more access to external markets and additional growth. A cumulative process of export growth and higher labor productivity, referred to as the vent-for-surplus model, was behind Smith trade optimism. It is important to note, however, that Smith's vent-for-surplus works in both directions. Higher costs (e.g. higher real wages) may lead to loss of external markets, no incentives for additional division of labor, and stagnation of domestic industry. In his model, success breeds success, but failure breeds failure.

There were very good reasons for Smith to think that free trade would be good for England in the late 18th century, and there even might be good reasons in the United States now, or at least for American corporations that would gain access to markets abroad. But the argument is far from universal, and the dressing of Smith's theory in modern garb is dangerous (for a classic explanation of Smith views on trade go here; subscription required; or here; also needs subscription).

The idea of absolute advantage, used by Smith, suggests that there is space for managing trade. I noted before that the opposite of Free Trade is not Protectionism, but Managed Trade. Nobody really wants to be in a completely closed economy, probably not even North Koreans. And once you admit a certain amount of management, say for sanitary rules to avoid importing poisoned toys, for example, or for security reasons to preclude defense secrets to leak out, you are discussing what are the good reasons for managing trade. Perhaps employment should be one of the reasons for managing trade. Free trade versus protectionism is a false dichotomy. The question is: how much management and for the benefit of whom (and who bears the costs of more or less trade as a result).

Note that comparative advantage theorems assume that employment is fixed, in the Ricardian system perhaps below full employment, and in the modern neoclassical HOS theory at full employment. Not surprisingly, on employment Mankiw tells us:

"Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs. Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there."

That full employment is possible with any pattern of trade is theoretically true. But from that does not follow that comparative advantage should guide trade. That is a theoretical non-sequitur and is simply wrong. The US could pursue using macroeconomic policies (not the lower taxes for the rich that Mankiw advocates, but that is another story) full employment.* That would lead to high current account deficits, which for the US, because of the privileged position of the dollar, are sustainable. But that is not true for most countries.

In that case, if free trade is pursued, absolute advantage might determine trade specialization, and lead to large current account deficits that would be unsustainable and lead to a balance of payments crisis, the need for austerity, with lower growth and unemployment following. Even in the US, patterns of trade integration might lead to the elimination of good manufacturing jobs being substituted by low paying service jobs, something that has led to trade unions' reasonable rejection of Free Trade Agreements (FTAs). In other words, "which jobs" one can get if one "import[s] from abroad those goods that can be produced more cheaply there [sic; that's actually absolute not comparative advantage]" might end up leading to lower wages at home.

For that reason it is hard to agree with Mankiw when he says that:

"People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries."

And there is evidence for that. The most famous FTA signed by the US with Mexico, has not favored workers in Mexico or the US, the North American Free Trade Agreement (NAFTA), even if corporations and wealthy individuals have benefited in both countries as shown in these reviews of the evidence by Robert Blecker and Mark Weisbrot and co-authors. So if mainstream economists agree on this, once again it is because they ignore logic (that does no require for trade to be determined by comparative advantage) or evidence (which suggests that FTAs might hurt workers).

* And also there is not tendency to a natural rate of unemployment, which Mankiw, of course, also defends.

Sunday, April 26, 2015

Roland Fryer wins the John Bates Clark medal -- Tyler Cowen shares the info, with a link to the AEA official announcement. The prize is a freakonomics prize. Fryer, for example, suggests that paying minority kids for grades might be a solution for inequality. He is also in favor of charter schools (my personal experience in SLC was terrible I should add). For a methodological critique of the freakonomics project see this book by Ben Fine.

Thursday, April 23, 2015

I had noted before that Obama was on the same side than some Republicans on the Trans Pacific Partnership (TPP), and on the role of Free Trade Agreements (FTAs) in general. Yesterday, Paul Ryan and Ted Cruz co-authored an op-ed in the Wall Street Journal in favor of fast track authority, which they avoid saying is giving power to Obama and strangely suggest it would empower Congress, and the TPP.

So not only is Obama for TPP, and he thinks that Elizabeth Warren is wrong in opposing it, but he agrees with Ryan and Cruz. By the way, Hillary is not much better on the free trade (and Bill signed NAFTA), even though it seems that she has not endorsed the TPP deal... yet. So mainstream Dems are on trade in bed with corporations, together with the GOP, which is pretty unified on this topic as far as I can tell. The recurrent problem is that there is no party for labor anymore. And not just in the US.

Wednesday, April 22, 2015

Here is Blanchard's summary of the last conference. Nothing much happening in all fairness, and certainly little impact on the policy advice that the IMF provides. On regulation, perhaps higher reserves is Blanchard's solution, and on monetary policy a higher target (which he does not discuss this time) and perhaps a defense of QE. But he only asks whether "the Fed [should] return to intervening only at the short end of the yield curve,
or are there good reasons for continuing to intervene along the curve?" No mention that intervening at the long end provides space for expansionary fiscal policy by reducing interest rates (the real reason for QE).

On fiscal policy the same. There is an admission that, contrary to Reinhart and Rogoff, there is no threshold above which debt-to-GDP hurts economic growth. The discussion of the debt-to-GDP ratio has vanished from the last WEO (Apr. 2015). This is good, since in the previous one (Oct., 2014) the IMF still argued that: "many advanced economies have little fiscal space available given still-high debt-to-GDP ratios and the need for further consolidation." Blanchard repeats the language of the last WEO. He says:

"But how to assess what the right goal is for each country? This remains
to be done. It has become clear that there is no magic debt-to-GDP
number. Depending on the distribution of future growth rates and
interest rates, on the extent of implicit and explicit contingent
liabilities, one country’s high debt may well be sustainable, while
another's low debt may not. Conceptually and analytically, the right
tool is a stochastic debt sustainability analysis (something we already
use at the IMF when designing programmes). The task of translating this
into simple, understandable goals remains to be done."

Interestingly, the policy advice remains the same. For example, on Japan the last WEO says that: "risks to public debt sustainability remain a key concern given high public debt ratios, and a credible medium-term strategy for fiscal adjustment with specific measures is urgently needed to maintain market confidence." And for the US: "the priority remains to agree on a credible medium-term fiscal consolidation plan to prepare for rising aging-related fiscal costs; this plan will need to include higher tax revenue." In Europe, you ask? Well, for the IMF: "in a number of countries, elevated public debt and high fiscal deficits highlight the need for fiscal consolidation." And with lower oil prices: "most oil exporters need to recalibrate their medium-term fiscal consolidation plans." So oil importers might have more fiscal space, wouldn't they? But WEO tells us that: "continued fiscal consolidation, steady implementation of reforms, and external financing are needed to maintain macroeconomic stability" in those countries too. Wait, who doesn't need fiscal consolidation according to Blanchard and his WEO report?

If there is no magic number, they found a loophole and are arguing for a magic range it seems. Whatever the situation fiscal consolidation seems to be a solution. Given that Blanchard's conference is about rethinking policy, not theory, which presumably is doing fine, shouldn't one expect some change in policy advice?

Monday, April 20, 2015

Campaign season started, and it is way too long if you think about it. At any rate, the discussion of how the GOP is for equality of opportunities, not outcomes, is already in the air. Sen. Marco Rubio has already suggested that.

If we assume that social mobility is a proxy for equality of opportunity and take some measure of inequality, say a Gini, as a proxy of equality of outcomes, one might get a sense of their relation. The figure below is from the book The Spirit Level and shows the data for a few countries.

Social mobility is measured as the correlation of income between different generations. As it turns, it seems that there might be a negative relation between inequality of outcomes, which is high in the US and the UK, with equality of opportunity (social mobility), which is low in those same countries.

Note that this is a limited set of countries, and that social mobility is not exactly equality of opportunity. But this is indicative that equality of opportunity might also lead to equality of outcomes. My guess is that many GOP candidates that pay leap service to the idea of equality (of opportunity) would not like this kind of result.

Sunday, April 19, 2015

Crowding In and the Paradox of Thrift -- Krugman praises Blanchard and the IMF research department. He too has rediscovered, but it was a few years back in his case, the accelerator. No word from him on why then all IMF policy advice is based on supply side reforms and why Blanchard thinks the priority in the US is fiscal consolidation. My take here. Note that here you have the typical organized hypocrisy story, the research department says reasonable things (accelerator), while the policy advice continues to be the same.

The economist's manifesto -- Tim Harford ask economists for policy advice. Often a terrible idea. Proposals are to abolish national insurance entirely (in my view the worst of all proposals) and replace it with higher rates of income tax, increase property taxes, to spend more on urban development, and R&D and infrastructure. Wren-Lewis proposes a rule for monetization of fiscal deficits when interests rates are at the zero bound. Not too bad.

What Causes Recessions? -- Noah Smith gives the traditional New Keynesian answer, shocks and price rigidities. No mention of endogenous cycles, meaning those that result from the normal functioning of the system. On that go here.

The object of the paper is to explore whether, or to what extent, a Marxian explanation of the current capitalist crisis is possible. The answer is that, although Marx’s theory offers important insights to understanding the ultimate causes of capitalist crises, it is not able to provide a fully satisfactory explanation of typical crises of contemporary capitalism. In particular, Marx’s analysis cannot account for the long periods of stagnation following the eruption of financial and economic crises. In Marx’s analytical context, crises are followed by recovery and growth in a relatively short span of time. It is argued that the main reason for Marx’s inability to explain crises of contemporary capitalism is that he developed his analysis by considering free-competitive economies, whereas modern economies are characterized by monopolistic competition. A more satisfactory explanation of the current crisis requires going beyond Marx’s original contributions.

Saturday, April 18, 2015

Sanford Schram, professor of political science at Hunter College, argues that the welfare system in the United States, as it is currently institutionalized, marks the poor as deviant, and, thus, manufactures their otherness in order to reinforce, or buttress, anti-welfare antipathy.

Friday, April 17, 2015

On my way to give the keynote speech at the Omicron Delta Epsilon International Economics Honor Society induction ceremony at San Francis College. If it's filmed, which is unlikely, I'll post it. Back tomorrow.

Thursday, April 16, 2015

"For example, the Taylor rule is Rt = RR* + πt + 0.5(πt -2) + 0.5Yt, where R denotes the federal funds rate, RR* is the estimated value of the equilibrium real rate, π is the current inflation rate (usually measured using a core consumer price index), and Y is the output gap. The latter can be approximated using Okun’s law, Yt = -2 (Ut – U*), where U is the unemployment rate and U* is the natural rate of unemployment. If RR* is assumed to equal 2 percent (roughly the average historical value of the real federal funds rate) and U* is assumed to equal 5-1/2 percent, then the Taylor rule would call for the nominal funds rate to be set a bit below 3 percent currently, given that core PCE inflation is now running close to 1-1/4 percent and the unemployment rate is 5.5 percent. But if RR* is instead assumed to equal 0 percent currently (as some statistical models suggest) and U* is assumed to equal 5 percent (an estimate in line with many FOMC participants’ SEP projections), then the rule’s current prescription is less than 1/2 percent."

The point is clear, given the uncertainty about what the natural rate of unemployment and the equilibrium or natural rate of interest actually are, then there is some space for keeping the Fed Funds rate close to zero, where it is.

John B. Taylor cited the passage above to criticize Yellen's view. He said:

"So the main argument is that if one replaces the equilibrium federal funds rate of 2% in the Taylor rule with 0%, then the recommended setting for the funds rate declines by two percentage points. The additional slack due to a lower natural rate of unemployment is much less important. But little or no rationale is given for slashing the equilibrium interest rate from 2% percent to 0%. She simply says 'some statistical models suggest' it. In my view, there is little evidence supporting it, but this is a huge controversial issue, deserving a lot of explanation and research which I hope the Fed is doing or planning to do."

Taylor is okay with not having a clue about the natural rate of unemployment (tells you something about a theory that depends on a variable they never know where it is), but seems to think that the natural rate of interest is really 2%. I haven't seen the empirical analysis that shows that the natural rate of interest is 2%.

Frankly, if the methodology is the same as used for the natural rate of unemployment, meaning some average of the actual rates, I'd be somewhat underwhelmed. And I'm not even going to discuss the logical problems of the natural rate of unemployment (yes, there is no such thing). But if Taylor were right, we should have inflation around the corner. He has been complaining about the Fed policy for a while, and inflation hawks have suggested that hyperinflation would follow Fed expansionary policy for six years now. The question is when would Taylor and the inflation hawks be satisfied that inflation is not accelerating? The answer is probably never. The new Taylor rule should be hike the rate of interest in every circumstance then.

Wednesday, April 15, 2015

The new edition of the bi-annual World Economic Outlook is out (there is one in April and one in October). Olivier Blanchard, from MIT, and the IMF's Economic Counsellor since 2008, is the intellectual force behind the report. In the IMF's view, in the case of the United States:

"The next prominent policy challenge will be a smooth normalization of monetary policy. Building political consensus around a medium term fiscal consolidation plan and supply-side reforms to boost medium-term growth—including simplifying the tax system, investing in infrastructure and human capital, and immigration reform—will continue to be a challenge." [Italics added]

Fiscal consolidation is IMF speak for austerity. Austerity is really about less spending, and higher taxes, but fiscal consolidation should be about the results, meaning lower deficits and debt. Note that austerity is NOT the best way to get fiscal consolidation. Also, normalization of monetary policy can only mean higher interest rates. So for the IMF we are at the natural rate, or so it seems.

In the case of the US labor markets are seen as flexible enough, so immigration is seen as central for keeping real wages low, rather than further deregulation. Yes, supply side reforms are often about lowering real wages. They do not provide much in terms of what austerity would mean. Again from the report:

"Addressing the issue of potential growth will require implementation of an ambitious agenda of supply-side policies in a fractious political environment. Forging agreement on a credible medium-term fiscal consolidation plan is a high priority... [This] will require efforts to lower the growth of health care costs, reform social security, and increase tax revenues." [Italics added]

Reform social security is IMF speak for cutting and delaying benefits, and increasing payroll taxes. Not necessarily privatize it, although some might be in favor of that at the IMF. So supposedly in the US the priority is to promote austerity by reforming social security. The New IMF is great.

On the plus side, the IMF has rediscovered the accelerator (I checked a few older versions and have seen no trace of the accelerator in the last couple of reports) and the report shows:

"estimates of how much investment weakness can be explained by output dynamics based on investment models estimated at the individual-country level. The analysis is based on the conventional accelerator model of investment... A key assumption is that firms adjust their capital stock gradually toward a level that is proportional to output. In addition, firms are assumed to invest to replace capital that depreciates over time... The empirical literature has found strong support for this model, as in Oliner, Rudebusch, and Sichel 1995 and Lee and Rabanal 2010 for the United States, and, more recently, in IMF 2014a and Barkbu and others 2015 for European economies."

Funny, so supply responds to demand, that is, firms adjust their supply capacity to expected demand, but all reforms for growth are based on supply side factors. Yeah, way to use the right theory, but keep the wrong policy advice.

Monday, April 13, 2015

Galeano, famous for The Open Veins of Latin America, among several other books, has passed away. He was a leading voice of the Latin American left, as The Guardian elegantly put it, which is a more accurate description than the 'anti-capitalist' epithet used by Reuters.

I inherited the copy of the book pictured above from my mom, who loved Galeano's books, in the 1980s, I guess, when I decided to study economics. I can't say that I was influenced by his book, even though Galeano thanks one of my teachers, Carlos Lessa.* He wasn't an economist, and I normally wouldn't post about it. But I decided to post something since, not long ago, a friend told me he had disavowed the book.

If one reads the accounts of his rejection of the book, it seems that it was the language, the vocabulary of the left in the early 1970s, which Galeano seemed to suggest that was heavy and dated, what led to his criticism of his work. Also, as he got older, and found mistakes in the book (sadly he doesn't specify which ones), his older self tended to be less satisfied with the result. Note, however, that in this discussion about what message he would like Obama to get from the book, after Chávez gave the US president a copy, he summarizes the basic point, which he seems to still uphold. In his words, he wanted Obama to get: "a certain idea about the fact that no richness is innocent. Richness in the world is a result of other people's poverty. We should begin to shorten the abyss between haves and have-nots."

A cursory look at the book might give you the not altogether incorrect sense that Open Veins provides a simplified version of Dependency Theory. Galeano was a popularizer of the kind of political economy that can be broadly defined as Structuralist. One not all together different from the one used for consumption in American universities, which simplifies and blames underdevelopment on developed countries, and that sees limited space for development in the periphery.** And, in that sense, it is a good thing that Galeano could say: "Reality has changed a lot, and I have changed a lot." But it is unclear that he threw the baby out with the bath water.

* If I had to say a book that influenced my choice to study economics, that I read in high school, it was Osvaldo Sunkel's El marco histórico del proceso de desarrollo y de subdesarrollo, which has a message that is not altogether different from Open Veins, namely that underdevelopment is part of the same process that caused development. Think of the Industrial Revolution in England, that goes hand in hand with deindustrialization in India. Industry and empire, as another historian would put it, are tied together.

Macro teaching and the financial crisis -- Simon Wren-Lewis praises the Carlin and Soskice textbook. The new edition adds the stuff from their three equation model, and is probably the most up-to-date mainstream New Keynesian textbook around. I got my copy last month, and have many problems with the book, in particular the resistance of getting rid of the natural rate concept.

A Quick Point on Models -- JW Mason on models. A bit older (I missed it), but worth reading. Yes models are about regularities, and you can measure capital for sure. BTW, what you cannot do, and Piketty does in his model, is to assume that there is a negative relation between capital intensity and its remuneration.

Notes on Frantz Fanon -- Branko Milanovic on why Fanon was all wrong, but you should still read it. I have my copy somewhere, that my mom gave me back in the 1980s. Not sure I would re-read as Branko did.

Saturday, April 11, 2015

A bit more on Peter Temin and David Vines book on Keynes. The explanation of the Great Recession is based on a traditional negative shock to the IS curve. Temin famously wrote the response Friedman and Schwartz Monetarist view of the Great Depression, his Did Monetary Forces Cause the Great Depression?, in which a contraction of consumption, and the IS, rather than the contraction of money supply and the LM was seen as the central story.*

So the same is essentially at work now. They say:

“the IS curve in the US moved left a great distance after the Global
Financial Crisis and the adjustments that followed. It moved so far that
the new IS curve no longer crossed the LM curve at a positive interest
rate.”

As can be seen below.

I can live with the representation of the Great Recession as a collapse of the IS (and yes the negative slope might be explained by other elements of demand, not investment, being inverse related to the rate of interest, like consumption or housing investment). I'm more troubled by the notion that the slow recovery is caused by the negative rate of interest, which in this case precludes the intersection of the IS and LM (note that, contrary to Krugman's negative rate, the equilibrium would not be the full employment one). But I do agree with the implied solution, not defended very forcefully, to my surprise, in the book, i.e. expansionary fiscal policy to bring the economy back to full employment.

In part, Temin and Vines do not defend fiscal policy strongly, because they bring the issues of an open economy to the forefront of the discussion, using James Meade's notion of internal and external balances. It's far from clear that they think this applies to the US, but in general their solution for a country with an external problem and unemployment, would be depreciation and austerity. In their words:

“The indebted country requires a combination of the two policies. Devaluation will increase exports and reduce imports. Austerity—just the right amount—will reduce home demand for goods and leave room for the production of extra exports and the home-produced goods that replace imports. The right combination of policies will move the economy to the intersection of the external balance line and the internal balance line, or even further down the internal balance line into the region of external surplus if the country is to begin repaying its debt.”

Note that without austerity the economy would overheat. That's a lot of confidence in the expansionary power of devaluation. As noted here several times, a devaluation can be contractionary, and it often 'solves' the balance of payments problem for that reason. Devaluation and austerity, by the way, were, and still are, the traditional policy measures imposed by the IMF on indebted countries. The implication seems to be that a combination of devaluation with austerity would produce, in the US too, a healthier recovery. The book is strangely positive on austerity, because of the external balance requirements, a position that, at least in this recession, other New Keynesians like Krugman and DeLong have temporarily abandoned.

And their analysis in the book about the post-war boom, the so-called Golden Age, is also not very good. Temin and Vines, even though they recognize the role of the Marshall Plan, emphasize the positive role of the IMF in promoting growth, and suggest that the IMF is an improved version of Keynes' proposal at Bretton Woods. In their words:

“The cooperation stimulated by American generosity in the Marshall Plan was a hallmark of postwar European progress... The IMF—an improved version of Keynes’ Clearing Union—eventually became a crucial policy-making institution... The IMF, which Keynes helped to design, was central to the restoration of growth.”

The Marshall Plan, which depended not just on generosity, but on fear of the Soviets, was clearly central. The role of the IMF in a global recovery of the 50s and 60s is hard to defend though. And Keynes Plan did not involve punishing indebted countries, which is what depreciation and austerity do, quite the opposite. In fact, Keynes was relegated to the debates on what became the World Bank at Bretton Woods, while Harry Dexter White was the central figure in the creation of the IMF. And the World Bank was, until the 1980s, a more benign instrument of US external economic policy, one might add.

But Temin and Vines also botch that one, and say:

“The World Bank, which was less central than the IMF, facilitated long-run growth. The World Bank was designed to help re-create the international pattern of productive trade that Keynes had described in The Economic Consequences of the Peace.”

Yes, the World Bank was created to recreate the pre-war pattern of trade, with the periphery selling commodities, and the center manufactures, and the British as the hegemonic... Oh wait. Yeah that makes no sense either.

* In later research Temin came closer to Eichengreen in putting the Gold Standard at the center of the Great Depression. For example, in his Lessons from the Great Depression. The seeds of his positive view on the role of depreciation are associated to his view that the abandonment of the Gold Standard was at the heart of the recovery. For a critique of that go here.

Friday, April 10, 2015

The Economist has noticed Peter Temin's paper on the death of economic history (on which I had posted before) and suggests that "since the financial crisis there has been something of a minor revival." There isn't much of an explanation of why there is a revival, or much evidence for the revival, I might add. The reason alluded for the supposed revival is that "three big questions in economics over the past few years have become battles over economic history, rather than theory in its own right." These three questions would be the effect of public debt on growth, the causes of inequality, and the effects of inflation and deflation.

The economic history content in the debates related to the three questions, in all fairness, is thin at best. And the problems with the debates actually do arise from a common acceptance of neoclassical economics, and are, thus, rooted in theory. Reinhart and Rogoff are not economic historians, and their discussion of debt, for example when compared to John Brewer's discussion of the role of debt in the rise of the British Military-Fiscal State, is poor at best. There is some discussion of the correlation with growth, inflation and currency movements, with limited understanding of causality. Which, as it turns, was botched by the misuse of data. The same can be said about Piketty (and now this Rognlie twist; he had vanished; my previous issue with him here), that uses mainstream theory that does not fit his data (which is better and shows the rise of inequality in the last three decades), but lacks any sense of history. There is no understanding of the social forces behind the rise of inequality in Piketty's work. And the idea that those that are afraid of inflation now have some basis on the history of "the risk hyperinflation has posed to democracy" is beyond preposterous. Not just because there is no risk of hyperinflation in any advanced economy at the moment (and that shows lack of theoretical understanding of what causes this phenomenon), but worse, it tends to obscure that the Great Depression, not the 1923 hyperinflation, brought down the Weimar Republic. Seriously, unemployment, the collapse of the economy creates the conditions for the rise of fascists (go check Greece now)

Note that marginalism always had a complicated relation with economic history. The German Historical School can be seen, or at least some authors within the school like Roscher and Schmoller, as noted by Bill McColloch (see second essay here), as part of the marginalist school. And Max Weber's views, which put Marx's relation between the economic base and the superstructure upside down, might be seen as the basis for a neoclassical theory of history. But the fact is that Weberian analysis was never embraced or even well understood in mainstream circles, even if it would be the kind of theory of history that would fit their analysis. The same applies to Douglas North's New Institutionalism.

My impression is that the decline of economic history, and history of economics I would add, within the mainstream of the profession, a subject that as noted by Temin had peaked in the 1970s, is essentially tied to the result of the capital debates, the rise of what I referred to as the return of vulgar economics, and the segregation of heterodox economists. It's a particular problem of the broader crisis of economics. And the revival is overstated. As much as the mainstream did not, and will not be abandoned in spite of its evident failures during the last (current) crisis, do not expect economic history courses (or history of thought ones) to be reinstated or created in the departments at the 'top' universities. The average mainstream economist will remain ignorant of history and the history of its own field. The Economist writers are a good example of the consequences of that.

Wednesday, April 8, 2015

I've been reading Peter Temin and David Vines new book Keynes: Useful Economics for the World Economy (see also this). It is a very introductory and conventional reading of Keynes, with the distinctive characteristic that describes the development of Keynes' ideas in the proper historical context. This is good, since Temin is an illustrious economic historian. But he is not a history of economic thought scholar, and that has important implications in this case.

If there is any doubt about the conventional reading of Keynes, one is reminded by them that Keynes theoretical innovation is that: "he abandoned the assumption that prices are flexible which had been made by almost all previous economists—including by him in his Treatise on Money—for the more appropriate assumption for the 1930s: sticky prices.” No notice that the whole chapter 19 of the General Theory (GT) is about wage and price flexibility to show that it does not solve the unemployment problem, and it actually makes it worse.

But that is not the the main problem with the book. That is, in fact, the common reading among both Old and New Keynesians, with the latter providing microfoundations for rigidities. The authors claim that: “in order to free the analysis from the assumption of full employment, Keynes had to free himself from the Quantity Theory too.” Actually that is incorrect, since one can have endogenous money, and abandon the Quantity Theory of Money (QTM), without getting rid of Say's Law, or the neoclassical version of it which implies full employment, as indeed Keynes had done in the Treatise on Money (TM), his Wicksellian book.

The view of the Keynesian Revolution as a movement from price flexibility to price rigidity is well documented, and even if it has no basis in Keynes, it might acceptable to some authors. Krugman, who is not a historian of thought, explicitly says he does not care what Keynes actually said, for example. Note that saying that Keynesian policies are necessary as a result of price rigidities is not the same that saying that Keynes actually said that. And for historians of economic thought the difference is important.

More problematic is the idea of the Keynesian Revolution as a movement away from the QTM. There is a lot of scholarship in this direction, including some from Keynes' own disciples, like Richard Kahn in his The Making of the Keynesian Revolution. Actually in the GT Keynes goes back to an exogenous money approach, and in that sense is closer to the QTM than in the TM, which had endogenous money. The important thing in the GT is that Keynes noted that the natural rate of interest in his TM should be abandoned. That is, the idea that the interest rate brings investment into equilibrium with full employment savings had to be substituted by the notion of changes in income bringing savings into equilibrium with autonomous investment. The theory of interest or monetary theory comes later as a result of the abandonment of the Loanable Funds Theory. This is not to say that the abandonment of the Quantity Theory of Money is not important, but clearly it is not sufficient to lead to a theory of effective demand.

The book also tries to show that there is a continuity in thinking between The Economic Consequences of the Peace and the discussions about the reorganization of the world economy at Bretton Woods. This is hard to defend, in particular since the book itself shows that Keynes' theoretical views changed as a result of the economic policy events, like the return to the Gold Standard at the pre-war parity, and the Great Depression. One of the important things about Keynes is exactly that, as stated in the phrase often attributed to him, when he was proven wrong, he changed his mind.

Tuesday, April 7, 2015

I have just come from Athens where I
have, for the last several days, had the high privilege of working with
the government of Greece, and especially with the Finance Minister, my
very good friend, Yanis Varoufakis. I’ve actually had two occasions, so
far, to observe the drama that’s unfolding in Europe from a close
vantage point.

The first one was during the week of the
negotiations that led to the landmark agreement on 20 February. And
then, in these last few weeks in Athens, which had their own drama as
they led up to a series of payments, including a very substantial one
that was due to the International Monetary Fund. All of which were,
let’s say, events followed with distinct interest around the world and
especially in financial circles.

Read full article here. He remains cautiously optimistic, or so it seems.

Sunday, April 5, 2015

How To And How Not To Attack Marx's Economics -- Robert Vienneau thoughtful account of various topics on Marxist scholarship. There is also this post by Lord Keynes on the LTV, which he has been discussing more lately. My views are closer to Robert's point of view.

Germany's trade surplus is a problem -- New blogger Ben Bernanke continues with the savings glut theme, and in this case he is right. Germany surpluses hurt the rest of Europe. Germany should spend more and allow the rest of Europe to enjoy less austerity.

The Inbred Bernanke-Summers Debate On Secular Stagnation -- Steve Keen's take on the debate (mine here), which is not on the substance of the debate though (he will post more later). The problem for Steve is that they all are New Keynesians, I think. Not sure if that is a problem. Don't get me wrong pluralism is important, but not sure how an Austrian perspective, for example, would help clarify matters.

Big data is watching you -- by Lambert Strether, via Yves Smith's Naked Capitalism. I was teaching on efficiency wages last week and told students about how much firms spend on monitoring. I remembered David Gordon's Fat and Mean, that had something to say about that.

Sir John and Maynard Would Have Rejected the IS-LM Framework for Conducting Macroeconomic Analysis -- Mario Seccareccia on the ISLM. Note that Hicks recantation is not particularly good. And regarding Mario's point about investment not being sensitive to the rate of interest (a point made here several times; it's the accelerator!) that does not mean that the IS is vertical. Other spending components might be affected by the rate of interest (e.g. consumption). I would say the problem with modern mainstream macro is that it abandoned (other than for teaching undergrads) the old ISLM. And also, everybody forgets that they not only abandoned the LM for the MP (which Mario notes, and that's just a flat LM), but that they abandoned the multiplier and the IS is based on an intertemporal Ramsey model (that's the problem; the return of Say's Law). On my views on the ISLM go here.

PS: I noted that Bernanke, a Republican, is at the Brookings Institution and not at the American Enterprise Institute. I was under the impression, maybe incorrect, that Democrats went to the Brookings, a center-left think tank, and Republicans to the AEI, a center right one. Something has changed if a moderate Republican can make it into the AEI.

Saturday, April 4, 2015

So Ben Bernanke is blogging now. He has basically defended his old idea that interest rates are low as a result of a global savings glut. Yes, it is basically the loanable funds theory of interest—with no consideration of the limitations associated with the capital debates—and the notion that the supply of funds, mostly associated to surplus countries like China, Japan, Germany and oil exporters, has pushed interest rates down.

This is essentially the same argument on negative interest rates that Krugman has made awhile ago, and not surprisingly Krugman has been favorable to Bernanke's post.*

In Bernanke's view the solution for the savings glut is: "to try to reverse the various policies that generate the savings glut—for example, working to free up international capital flows and to reduce interventions in foreign exchange markets for the purpose of gaining trade advantage." This would, presumably, move the investment schedule and lead to a recovery.

[...] "unless the whole world is in the grip of secular stagnation, at some point attractive investment opportunities abroad will reappear. If that’s so, then any tendency to secular stagnation in the US alone should be mitigated or eliminated by foreign investment and trade. Profitable foreign investments generate capital income (and thus spending) at home; and the associated capital outflows should weaken the dollar, promoting exports. At least in principle, foreign investment and strong export performance can compensate for weak demand at home."

I have criticized the global imbalances story before. As I noted then the actual problem is that the global imbalances are small. The empirical evidence for a external recovery on the basis of a more depreciated dollar is not convincing, but that is not the main problem with this argument. Both the secular stagnation as discussed by Summers, and the savings glut, as presented by Bernanke rest on the idea of an excess supply of savings, and a negative natural rate of interest. Summers says that the: "essence of secular stagnation is a chronic excess of saving over investment" and that "secular stagnation and excess foreign saving are best seen alternative ways of describing the same phenomenon."**

The main disagreement between Bernanke and Summers is on the solution. Summers is skeptical about exchange rate depreciation as a solution to the US stagnation. In his words:

"Successful policy approaches to a global tendency towards excess saving
and stagnation will involve not only stimulating public and private
investment but will also involve encouraging countries with excess
saving to reduce their saving or increase their investment. Policies
that seek to stimulate demand through exchange rate changes are a
zero-sum game, as demand gained in one place will be lost in another."

And no the problem is not competitive depreciations, as Summers suggest. And not even a question of whether depreciation, the relative price substitution effect, would be enough to boost exports or reduce imports, which might be questionable (the last evidence I saw suggested that income elasticities tend to be larger than price elasticities, meaning that foreign trade responds more to changes in the level of activity), by the way. The problem is this notion that the solution is based on surplus countries spending more, as if the US does not have a privileged position and its external (and by the way domestic) deficits do not matter.

What Summers is saying is that depreciation does not work, but we need China and Saudi Arabia to boost the world economy. Seriously?! The US should be doing expansionary fiscal policy, and with that current account deficit would be even larger. The notion that there is a current account sustainability issue or that the dollar international reserve position might in danger is not particularly strong. But, at least on the policy issue, Summers is correct. Fiscal expansion is needed. Note, however, that there is no secular stagnation problem, associated to lack of investment opportunities. There is a political problem (remember Kalecki) that precludes more fiscal expansion.

* Krugman arguments were normally about the domestic economy, and the problem of the zero bound interest rate, or what he calls the liquidity trap.

** And there are too many problems with the excess savings story to discuss here. The investment schedule and the very existence of a natural rate of interest, negative or otherwise, is plagued by logical problems and by the complete lack of empirical evidence, since investment really reacts to changes in the level of activity (accelerator). Also, the notion that intertemporal decisions govern consumption behavior is not without its problems. That's why Keynes tried to abandon the loanable funds theory and developed effective demand, in which income adjusted for differences between investment and savings.

Friday, April 3, 2015

BLS report shows that employers added only 126,000 workers in March, and the rate of unemployment remained at 5.5%. Labor force participation and employment population ratio basically unchanged. I want to see how inflation hawks are going to spin the need for raising the rate of interest now.

Thursday, April 2, 2015

The following was posted here - I had originally written it for students in one of my intermediate courses:

Economics (indeed every discipline of the social sciences) has never been, and never will be, value-free. Social scientists have always relied, and will continue to rely, on sets of elaborate positions, perceptions, and views about the ultimate nature of reality; essentially, it is the reliance on preconceived notions of how the world works, and how it should work, when analyzing manifest phenomena. Aspects of conscientiousness precede investigation and thus one cannot separate the knowing mind from the object inquiry. What constitutes a fact perceives the observation and hence the conception of what is determined as socially significant; the mind is active in constructing and determining the lens through which observation deciphers what of social phenomena is worthy of factuality.

All theorizing is based on first order principles (Lawson, 1989). Thus, what underlie all theories of human behavior are general apperceptions and ideological convictions of the relationship between the individual and society. They are epistemological foundations-what Joseph Schumpeter labeled as 'preanalytical visions'-which dictate modes of examination and inquisition. Hence, different pre-analytical visions predispose the focusing on different social and economic problems and lead to entirely different attitudes towards social settings and human actions within those settings. Preanalytical visions have pertinent implications for normative assessments of the human condition.

The neoclassical, or mainstream, if you will, preanalytical conception of the human being is that of the single-minded seeker of maximum utility (pleasure with respect to cost-benefit analysis and bounded rationality). This perspective perceives that the nature of individual preference orderings, with respect to consumption, is taken as given (more like taken for granted) and primary, without regard to agency and the social institutions and processes within which likes and dislikes are formed. The surrounding within which individual actions take place is conceived as an endless array of opportunity costs for the attainment of constrained optimization.

Categorical positions such as class, gender, and race are systematically negated in favor of centering attention on the (rather fictitious) assumption that society is based upon isolated exchangers/producers maximizing pleasure with initial endowments given by the Malthusian notion of the natural lottery of life. The only way in which human sociality appears is in individual needs for other entities with whom to exchange. In this sense, all economic theory is exchange theory.

Neoclassical economics determines the value of a commodity on the basis of utility derived from it. The more utility that one derives from consuming a commodity, the higher would be its value. Utilitarianism is the underpinning of the theory, which holds this value to be the true value despite the fact that pleasure, is an entirely subjective feeling that varies from consumer to consumer. The theory holds that when commodity A is exchanged for commodity B, the ratio in which the exchange occurs is determined by marginal utility (MU) derived by consuming the last units of commodity A and B. The crucial point is that the origin of value lies essentially in the institution of the market since this is the arena where isolated individual exchanges occur. Hence, the successful functioning of markets reveals how the values of commodities reflect their true values because free market exchanges are seen as complete contracts.

This ideation of utilitarianism does not question the social origins of conscious human desires. The Benthamite dictum that nature places mankind under the governance of two sovereign masters-pain and pleasure-reigns supreme. The issue of whether or not desires are exclusively metaphysically given is completely ignored. Human beings are simply assumed to be sophisticated calculating maximizers of utility. Hence, it is understood that exertions of work by individuals are never undertaken without the promise (with respect to consumption) of greater pleasure or the avoidance of greater pain (Hunt, 2001: 132). Differing social and cultural contexts make no difference whatsoever.

In this sense, neoclassical economics rests on the notion that Robison Crusoe is the natural, universal, pervasive unalterable characteristic of all human beings in all societies. The aim is to demonstrate how the competitive capitalist economy automatically obtains efficient situations in which it is impossible to make one person better off without necessarily making someone else worse off whereby unique organizations of production, exchange and distribution lead to maximum attainable social welfare.

Situations of conflict are defined away; situations where improving the lot of one unit is not opposed by other naturally antagonistic units are rare within this view. Since the level of analysis is on rational calculating individual units and not social units, how can changes that might make some better off without making others worse be discerned? It precludes the scientific evaluation of the degree to which existing desires reflect underlying universal human needs and the particular sets of social institutions that enhance the necessary capabilities for which these human needs can be met.

In addition, the most essential differentiating feature of capitalism-private property-is viewed as eternal, universal, and inherently just. It absolves capitalism of all the exploitation that is undertaken to produce and make profits. Total income of society is produced and distributed simply by some sort of 'natural law'. Thus, if workers have appropriate moral virtues and exercise responsibility, jurisprudence, self-control, and unremitting hard work, they can easily become entrepreneurs and accumulate capital.

Heterodox economics, on the other hand, examines the welfare of human beings through a lens that accentuates and exhibits interconnections. Within this preanalytical vision, it is appropriate to speak of systems of human behavior and visualize modes of productions that govern how human beings relate each other at historically specific times in the process of extracting from nature the means for human survival.

Starting with an analytical framework that invokes recognition of specific modes of production, we have the capacity elucidate the underlying processes that actually govern how the products of labor are distributed and how labor in general is assigned to specific technical processes. From this perspective, we can visualize historically specific modes of political power gives us the means that detail the apparent characteristics of social decision-making and the ordering of rights, privileges and responsibilities.

In contrast to utilitarianism of neoclassical economics, heterodox economics understands human beings distinctly as producers and focuses on the fact that the starting point of any theory is the recognition that that in all societies the process of production can be reduced to series of human exertions. It is ascertained that humans, unlike animals, generally cannot survive without exerting effort transforming natural environments into more suitable living spaces. Where utilitarianism sees humans in individualistic terms where there is no difference between exchanging with nature and exchanging with other human beings, heterodox economics sees human beings as cooperative social beings dependent on each other for human survival.

Since capitalism directs production solely for the impersonal institution of the market, interdependent labor is indirectly social. To illustrate this, Karl Marx noted:

Under the rural patriarchal system of production, when spinner and weaver lived under the same roof-the women of the family spinning and the men weaving, say for the requirements of the family-yarn and linen were social products, and spinning and weaving social labor within the framework of the family. But their social character did not appear in the form of yarn becoming a universal character exchanged for linen as a universal equivalent, i.e., of two products exchanging for each other as equal and equally valid expressions of the same universal labor time [as it w would be the case under capitalism]. On the contrary, the product of labor bore the specific social imprint of the family relationship with its naturally evolved division of labor. Or let us take the services and dues in kind of the Middle Ages. It was the distinct labor of the individual in its original form, the particular features of his labor and not its universal aspect that formed the social ties at that time. Or finally let us take communal labor in its spontaneously evolved form as we find it among all civilized nations at the dawn of their history. In this case the social character of labor is evidently not affected by the labor of the individual assuming the abstract form of universal labor…The communal system on which this mode of production is based prevents the labor of an individual from becoming private labor and his product the private product of a individual; it causes individual labor to appear rather as the direct function of a member of the social organization (cited in Hunt, 1991).

In addition,

As a general rule, articles of utility become commodities only because they are products of the labor of private individuals or groups of individuals who carry on their work independently of each other [in capitalism]. The sum total of the entire labor of these private individuals forms the aggregate labor of society. Since the producers do not come into social contact with each other until they exchange their products, the specific social character of each producer's labor does not show itself except in the act of exchange. In other words, the labor of the individual asserts itself as a part of the labor of society, only by means of the relations which the act of exchange establishes directly between the products, and indirectly, through them, between the producers. To the latter, therefore, the relations connecting the labor of one individual with that of the rest appear, not as direct social relations between individuals at work, but as…social relations between things (cited in Hunt, 1991).

Heterodox economics exposes the true nature of social organization under capitalism that leads to extraordinarily pernicious effects on workers. The capitalist market systematically prevents many from developing real conscious desires that reflect potentialities for self-realization and self-appreciation, i.e. become "emotionally, intellectually, esthetically developed human beings" (Hunt, 2002:242). Human senses are shaped and refined through working and transforming nature into useful things. It is through one's relations with what one produces that an individual achieves pleasure and satisfaction. Through visible direct interdependent social production, recognitions of one's ability, dexterity, and talent are palpable. Under capitalism, however, the scenario is quite different:

The bourgeoisie, wherever it has got the upper hand, has put an end to all […] idyllic relations. It has pitilessly torn asunder the motley […] ties […], and has left remaining no other nexus between man and man than naked self-interest, than callous cash payment. It has drowned the most heavenly ecstasies of religious fervor, of chivalrous enthusiasm, of philosophical sentimentalism, in the icy water of egoistical calculation. It has resolved personal worth into exchange value (cited in Hunt, 2002: 242).

This social organization of production is not oriented to human needs and aspirations, but rather by profit calculations estimated by legally protected extortionists (capitalists, or the bourgeoisie). The effects are total and degradation and total dehumanization of working-class people where they are reduced to nothing but disconnected brutes engaged in simple animal functions, not developing freely their physical and mental capacities. Capitalism, as such, is the accumulation of wealth at one pole, and the accumulation of misery, agony of toil, slavery, ignorance, brutality, and mental degradation at the opposite pole (Cited in Hunt, 2002: 244).

Heterodox economic analysis make it apparent whether or not society meets basic human needs and are translated into realized conscious desires for higher stages of human development. It shows that with a materialist approach to the study how humans relate to each other and organize to produce what is necessary for survival one can justifiably assert whether certain systems of human behavior do, in fact, generate the conditions for social harmony.

In hindsight, it is nearly impossible (if not completely impossible) to formulate egalitarian economic and social policies based on neoclassical ontology and epistemology. Perspectives that only consider market exchange, with a reductionist sense of human desire, systematically disregard the social nature of production; in the final instance, they effectively negate clear understandings of the totality of socioeconomic inequity (Campbell, 2010).

***NOTE - This neither covers the social nature of money nor the heterodox Post-Keynesian/Sraffian perspective, which are quite pertinent; as such, it is worthwhile for the student to refer to the following:

Bortis, Heinrich. 2003. “Keynes and the Classics: Notes on the Monetary Theory of Production.” Modern Theories of Money: The nature and role of money in capitalist economies 411–75.

Hein, Eckhard. 2006. "Money, Interest and Capital Accumulation in Karl Marx's Economics: A Monetary Interpretation and Some Similarities to Post-Keynesian Approaches *." The European Journal of the History of Economic Thought 13(1):113-40.

Wednesday, April 1, 2015

But he does want the Fed to raise rates soon and resolutely. Why? Because the labor market is too tight. Yes, I know (see here and here). One interesting thing is that a prominent Republican economist says that this is a "solid economic upturn." So there are some Republicans for Obama then.

More interestingly he suggests that the Fed's lack of preoccupation with inflation, since Janet Yellen does not seem to believe that 5.5% is the natural rate, is misplaced. But there is more. In his view, nobody should be concerned if inflation is below the target. In his words: "who cares if the inflation rate is a bit below an arbitrary 2% target?" Exactly, who cares about an arbitrary 2% target. Who? Feldstein of course, since he is really concerned that inflation would be above the arbitrary 2% target.

Besides, the notion that double digit inflation rates are around the corner is preposterous. And the problem of financial stability is not related low interest rates, but to the lack of regulation and the gutting of the Dodd-Frank legislation.